A. L. Laboratories is headquartered in Fort Lee, New Jersey, and also has operations in Scandinavia and Indonesia. The company develops and produces generic pharmaceuticals, specializing in both over-the-counter and prescription creams and ointments, aerosol inhalants, and liquids such as cough syrups. A significant share of its income is also derived from the development and distribution of animal health products such as food additives for poultry. The company was founded in 1975 and today has more than 2,700 employees.

Gross profit at A. L. Laboratories declined both in dollars and as a percentage of revenues. The decline was attributed to lower sales volume, customer credits associated with product recalls, inventory disposals, and the impact of higher inventory costs. In addition, the gross profit percentage declined as a result of lower production volumes.

\section*{Instructions}

(a) What account is affected when A. L. Laboratories has a product recall?

(b) What factors caused gross profit to decline?

(c) What factors could cause this company to have to dispose of inventory?

(d) How would you expect the gross profit rate and operating expense ratio of a producer of generic drugs to compare with those of a name-brand producer?